Most people like the idea of owning real estate because it can create long-term, stable income. Over time, the property also tends to appreciate in value through inflation. When you look at the real estate market as a whole, you will find that the best minds in finance agree. Money managers at pension funds and institutional equity funds are consistently putting capital into real estate. Here are 3 reasons why they do so:
- Capital Appreciation
Pension funds buy real estate because it appreciates over the long term. The Canadian dollar has lost 95% of its value in the past 100 years through inflation. Conversely, hard assets (like real estate) have offset this loss in dollar purchasing power by increasing in price. The Bank of Canada will do whatever it can to maintain a core inflation of around 2% to keep the “economy moving”. Therefore, real estate tends to appreciate over the long term simply due to the inflation factor (among many other reasons). As a small landlord, you can benefit by buying residential real estate instead of the large multi-family buildings, shopping malls and commercial developments pension funds often purchase into.
- Cash-flow
Large institutions buy real estate because it creates a stable income stream. Real estate owners benefit from both a rise in value and the regular rental income a property can produce by leasing it out. The cash-flow creates a positive yield for investors.
The benefit of owning residential real estate in Canada is that people must have a roof over their head. It gets cold in winter! The fact that shelter is a necessity in Canada allows a residential landlord to make money in good times and bad. If the market is down, and the price of real estate has decreased, a landlord can continue to collect cash flow until prices increase once again. When the market rises, owners benefit from both the monthly cash flow and the increase in property value. This principle works the same for the individual landlord and the pension fund manager.
- Not correlated to the stock market.
Many understand that diversification of a portfolio is beneficial. Real estate is not directly correlated to the stock market. Real estate tends to hold value, is fairly stable, and is not subject to the volatile ups and downs that occur in the stock market – a bonus for fund managers! If you own real estate, you will see that as well. A given property will generate cash flow based on its local market and can protect equity even when the markets are volatile.
If you have a pension, there is a good chance you already own some real estate indirectly. It is time to think like a pension fund manager and acquire the benefits that rental income and equity accumulation can create. Real estate truly provides great opportunities to build long-term wealth.
Links:
“Pension plans hold the bulk of real estate investments,” Personal Finance, The Toronto Star, – http://bit.ly/2hpNWVq